Europeans Vow Effort to Bring Economies Closer

STEPHEN CASTLE

Saturday

Mar 27, 2010 at 5:11 AM

Plans for economic coordination in the E.U. will need to overcome obstacles and ideological differences.

BRUSSELS — Jolted by the Greek debt crisis and alarmed at the prospect of bailing out a fellow member state, European Union leaders on Friday promised new efforts to coordinate policies to bring their divergent economies closer.

At the end of a two-day summit meeting in Brussels, Chancellor Angela Merkel of Germany made clear her determination to rewrite the economic rulebook for the European Union, even if that means a long and bruising battle to revise the treaty governing the bloc.

But the European Union’s latest plans for greater economic coordination — which could have an effect on national governments’ right to dictate policies on taxation and spending — will need to overcome practical obstacles and ideological differences if they are to become reality.

After weeks of division between Germany and France, the new blueprint began to emerge on Thursday when the two countries brokered a deal under which all 16 nations that use the single currency agreed to last-ditch refinancing for Greece if it was unable to raise borrowing on the financial markets.

As its price for agreeing, Germany has opened the door to moves to reshape the way the euro is managed.

Over the coming months, the European Union will debate ways of intervening early to prevent economies from veering off course, as well as more radical long-term proposals that could even mean ejecting nations from the single currency.

“We have seen in dealing with deficits,” Mrs. Merkel said, “that our procedures are simply not sufficient and that we have to draw lessons from that.”

Although the European Union has just completed eight acrimonious years rewriting its newest treaty, Mrs. Merkel said she thought it “will not be possible to bypass treaty change.”

A declaration agreed to by the euro countries late Thursday promised to improve economic governance — or in the French version of the text “economic government” — but, in truth, there is no consensus on what this means under either translation.

Nicolas Sarkozy, president of France, had pressed hard for a meeting of euro zone leaders to take place on Thursday, because he sees this as the vehicle of future integration.

But Mrs. Merkel said Friday that economic governance was for “the whole of the 27 states” of the union.

If there is no agreement on who should improve the economic governance of Europe, there is even less clarity yet on how to do it.

The European Union already has a strict rule book, called the Stability and Growth Pact, which lays down a process to keep budget deficits within strict limits and even has penalties for not doing so.

The difficulty is that it was France and Germany — the two countries behind the latest declaration — that weakened the pact when they breached the deficit limit of 3 percent of gross domestic product for the third successive year in 2003.

At the time, the pact appeared too rigid and seemed to be consigning European economies to stagnation.

But, seven years later, the Greek crisis has shaken euro countries and forced them to accept that, if policies go awry in one country, its neighbors may have to pick up the bill. Significantly, all 16 nations of the single currency, including Portugal, Spain and Ireland — which themselves have deep financial problems — agreed to take part in a rescue mechanism for Greece.

“Certainly the benign neglect that was going on before is no longer possible,” said Jean Pisani-Ferry, director of Bruegel, an economic research institute in Brussels.

“You cannot just say there is no risk.”

Though creating a system to curb future economic excesses in member states — particularly large ones — will not be easy, there are now several ways this closer economic coordination could take shape.

The meeting this week set up a task force to discuss longer-term proposals, including one from Germany for a European Monetary Fund.

Ideas that would clearly need a change of the governing treaty, like depriving nations in breach of the rules of their voting rights, will be examined.

Another radical suggestion from Mrs. Merkel, that recalcitrant countries could be ejected or suspended from the euro zone, to allow them to devalue their currencies, is also expected to be examined.

Meanwhile, the European Union heads of government, meeting in the European Council, are taking greater responsibility for economic policy coordination. On Friday, they discussed a strategy to create a more competitive economy by 2020.

Mr. Pisani-Ferry said it was significant that prime ministers were getting involved.

“The lesson drawn,” he said, is that the euro zone finance ministers, who meet regularly, are “not up to the job.”

“If you want a country to change course you have to speak to the prime minister, not the finance minister,” he said.

Meanwhile, Olli Rehn, European commissioner for economic and monetary affairs, will propose plans to tighten monitoring of economies in the euro zone.

Crucially, a tightening of the pact — for example, to allow the European Union to flag looming problems in countries before they happen and to press governments to change course — could be achieved without changing the treaty, a long and cumbersome process.

Mr. Rehn has already proposed laws to give the statistical agency of the European Union the power to audit national governments if — as in Greece — there are doubts about the data they submit.

Bringing together these strands to give the euro zone a more stable currency “won’t be easy,” Mr. Pisani-Ferry said, “but the big change is that there was a complacency around about the fact that every outcome was benign. That’s gone, and that’s significant.”

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